Hyperthetical: What Happens To Investment Money

carlx

Hello All,

I have a quick hyperthetical question regarding investment money, i cannot seem to find a suitable answer to my question and i keep getting American search results from Google so i thought i would ask the smart people here.

Person A, is director and 100% shareholder of a "AFakeCupcakeCompany", it is a limited company and has no assets and no cash, however Person B, invests £25,000 into the company for 50% shares within the company which leaves Person A also holding 50% shares.

The company trades well for 5 years, by the end of year 5, the company hasn't paid out any dividends to the shareholders, instead reinvesting profit into the company to grow and increase turnover.

At the end of year 5, Person A wants to close the company. The company has £85,000.

My question is,

Option A: Is the initial £25,000 investment paid back to the investor and THEN split half of the remaining money, in this case £65k/2=£32,500 to each shareholder.

Or

Option B: Is the full £85,000 split evenly? £42.5k each.

My gut is that it is option A.

I am interested in hearing experienced peoples advice.

Cheers.

paddyrg

B. You both own half of the company, so unless your M&A or share classes state otherwise, each takes half.

If you wanted the £25k back first, it would have been a loan, so you wouldn't be a shareholder.

£75% profit in 5 years is awesome, don't get greedy!

Alternatively, buy the original director out of the company, or find someone to buy his/her shares, and keep running the business.

Savvy_Sue

And one would hope there would be something in writing covering this situation ...

carlx

paddyrg wrote: »

B. You both own half of the company, so unless your M&A or share classes state otherwise, each takes half.

If you wanted the £25k back first, it would have been a loan, so you wouldn't be a shareholder.

£75% profit in 5 years is awesome, don't get greedy!

Alternatively, buy the original director out of the company, or find someone to buy his/her shares, and keep running the business.

Thank you for the response, it wasn't the answer that i naturally assumed but it helps with the process that i am in.

paddyrg

carlx wrote: »

Thank you for the response, it wasn't the answer that i naturally assumed but it helps with the process that i am in.

No worries. If it helps you to understand the pretty clear-sounding position - The £25k wasn't a loan, it bought shares, the money became the property of the business (of which you own half), which it grew to £85k (which is still jointly owned).

If it had been a loan, you would have an agreed repayment date/terms/conditions and the interest payable before lending it. The other party would have still owned 100% of the shares, and so own the full £85k (less the £25k they repay you and agreed interest), so you'd have got back maybe £30k instead of £42.5k.

Mistral001

carlx wrote: »

Hello All,



Person A, is director and 100% shareholder of a "AFakeCupcakeCompany", it is a limited company and has no assets and no cash, however Person B, invests £25,000 into the company for 50% shares within the company which leaves Person A also holding 50% shares.


.

It looks like, although there were no assets or cash at the time person B bought the shares, he/she must have seen something of worth in the company. Going by the growth that later took place in said company, it seems that person B has good business judgement.

TheTracker

The tone of the request suggests there may be dispute or disagreement. If instead you are both looking at ways to extract money in a different ratio there are options. One party could sell shares to another, though they'd have to be fair value. If one party doesn't want to close the company and the other does, that could be some justification. Or one party could be paid a higher salary for the current year, though tax would need to be considered. Or one party could be made an employer pension contribution.